Assessing the 2005 Growth and Stability Pact Reform: A New Fiscal Policy Rule for the Euro Zone Is Required

Abstract

This paper analyzes the 2003 and 2005 Growth and Stability Pact reforms in the light of the 2008 financial crisis and national counter-cyclical fiscal policies followed in the euro-zone since then. It uses the Kopits-Symanski (1998) fiscal policy rule model in order to assess the evolution of fiscal governance before and after the reforms. Most of the characteristics of the model suffered sharp deteriorations: precision, simplicity, consistency and strong executive power, leading to a final conclusion of a better post-2003 GSP but a worse post-2005 GSP, the issue of the penchant of euro zone members for free rider behaviour requiring particularly strong executive power and coercive capacities. Because of degrading fiscal governance since 2005, the euro zone lacks a proper tool to back monetary policy and to follow long run sustainable growth because of increasing debt default risk among its members.